The ‘Barbarians at the Gate’ may actually be getting something right

A scene from “Barbarians at the Gate,” a television movie based upon the book of the same name.

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Barbarians At The Game

There is a long-running debate in private-equity investing.

Do the funds, which have won the moniker “Barbarians at the Gate,” create value by financial chicanery or by actually improving the businesses they’ve bought?

There has long been skepticism about the latter, as the $3.5 trillion industry’s often aggressive approach is sometimes portrayed in a bad light.

Private-equity companies that swept into the ambulance business due to its “tremendous growth potential,” for example, reportedly instilled aggressive billing practices and pushed some operators to bankruptcy.

However, researchers have found hard evidence that these funds can actually drive returns through improving the business.

“Further, CEPRES found that increase in valuation ofcompaniespost GFC is driven more by EBITDA Growth than prior years. Thisevidence supports the view that Activist PE Fund Managers areeffective and able to deliver on the promiseof delivering returns through Value Creation. CEPRES also found that valuations are currently being driven by increased market pricing – commonly called Multiple Expansion.”

Private-equity-owned portfolio companies significantly outperform similar non-private-equity owned companies in terms of EBITDA, sales, and assets post-buyout, according to that report.

“Our research shows that private equity-owned companies achieve significantly better operating profitability, assets and sales over the first three years of private equity ownership compared with matched companies that are similar but not owned by private equity funds,” said Florin Vasvari, professor of accounting at London Business School.

“The results show that while GPs focus on growth they also generate significant operational improvements that likely contribute to that outperformance.”